Goodwill on incorporation - back on? • Worth considering selling goodwill again now CGT rate only 20%? • Share of goodwill valued at £1,000,000 • Transfer to Ltd company 30 June 2016 • CGT due 31 January 2018 = £200,000 • £1,000,000 credit to loan account • Net cost £800,000 • No CT deduction for goodwill amortisation • Say 10 years = £100,000 p.a. disallowed • Sufficient profits to pay dividends?
Run Rental Business through a company? • From 6 April 2017 buy to let interest restricted • Companies will still receive interest relief against rental and other profits • Income and gains taxed at 20% => 17% • Indexation available against gains • Double taxation – taxed again when extract profit • £5,000 dividend allowance • Long term? • No CGT or IHT relief on shares
Run Rental Business through a company? • Transfer existing rental business to company? • CGT – properties transferred at MV + SDLT • Hold over gain using s162 TCGA 1992 • Transfer of business in exchange for shares • Gain held over into base cost of shares • Is it a business? • Mr and Mrs E M Ramsay v HMRC (UTT) • 20 hours a week running rental business - YES
s162 incorporation relief – is it a business? • Ramsey v HMRC UKUTT • S162 TCGA holdover applies on transfer of a business • Does not have to be a trade • Gains held over into base cost of new shares issued • Property rental business transferred – 10 flats • FTT agreed with HMRC that not operated as a business! • 20 hours a week arranging maintenance, collecting rent, cleaning between lets • Wrong decision? – Overturned at UTT
Entrepreneurs Relief 10% CGT on first £10,000,000 gains now
Disposal of business assets • Disposal of all or part of a business • Disposal of shares in or securities of a company, or • Disposal of assets following cessation of a business (3 years) (NB – C16 striking off now gone – must liquidate now)
Entrepreneurs Relief Trading Liquidation 4 YEARS 1 YEAR Entrepreneur relief on capital distribution if within 3 years
Entrepreneurs’ relief – Shares and Securities • Shareholder conditions: • Officer or employee • 5% of shares and voting rights Min 1 year • Company conditions: • Trading company
Entrepreneur’s Relief - associated disposal • Asset used by partnership or personal company • Relief available where disposal results from disposal of all or part of the business or shares AND • Withdrawal from the business • Just and reasonable apportionment of gain eligible if charge rent
“Withdrawal from Business” • HMRC guidance CG63995 • Associated disposal and material disposal of business assets linked • Relief not due unless the disposal is related to the individual’s reduction of • his interest in the assets of the partnership • or holding in the company • From 18.3.2015 – must dispose of at least 5% of shares or partnership interest
Entrepreneurs’ Relief – Castledine case • Mr C held 5% of company’s ordinary shares • The company had also issued a number of deferred shares – no rights to dividends, no votes, limited rights to capital on a winding up = worthless • Should these shares be considered as ordinary share capital? If so Mr C only had 4.9% • Held: deferred shares are ordinary shares • Issued for a genuine commercial purpose • As < 5% held by Mr C no entrepreneurs’ relief
Entrepreneurs’ Relief – McQuillan case • Mr and Mrs McQ each held 33% of company’s ordinary shares (total 100) • The company had also issued 30,000 redeemable non- voting shares – representing a loan to company • No voting rights, no dividend rights, redeemable at par • Should these shares be considered as ordinary share capital? If so Mr and Mrs McQ held <1% • FTT: the redeemable shares not ordinary shares • UTT: consider all shares unless have fixed return • No entrepreneurs relief
Entrepreneurs’ relief – Shares and Securities • Shareholder conditions: • Officer or employee • 5% of shares and voting rights Min 1 year • Company conditions: • Trading company
Entrepreneurs’ Relief – Not officer/employee • J K Moore v HMRC (2016) UKFTT • Purchase by company of own shares • Mr Moore owned 3,000 out of 10,000 shares • Fell out with other directors – benefit company trade to buy back 2,700 his shares (90% reduction) • 300/7,300 after buy back (4.1%) = CGT • But – entrepreneurs relief? - NO • Resigned as director 28 February 2009 • Special resolution for buy back 29 May 2009
Associated disposal? MR BLOGGS BLOGGS LTD
Company distributions CGT or IT? 52
HMRC Guidance on Winding up TAAR • Sections 35 in Finance Act 2016 - introduced Targeted Anti- Avoidance Rule • ITTOIA 2005 section S396B and s404A • Certain distributions on a winding up taxed as income not CGT = up to 38.1% rather than 10% • Applies to transactions from 6 April 2016 • New HMRC Manual Guidance - CTM36300
Liquidations taxed as income if: • A close company is wound up and an individual (S) • with a material interest (5%) receives proceeds from the shares • Within two years of that distribution S (or a connected person) continues to be, or becomes, involved in a similar trade or activity ; and • One of the main purposes of the winding up is to obtain a tax advantage • Note – successor could be unincorporated business
Company distributions • Company Liquidation previously taxed as Gain = 10% with entrepreneurs relief • Where income accumulated in company may now be taxed as income? – Finance Act 2016 • Profits 1,000,000 • Less corporation tax 20% (200,000) • Retained profit £800,000 • CGT @ 10% (80,000) • Net cash to shareholder £720,000 28% tax • Dividends taxed at 7.5%,32.5%, 38.1% now
Company liquidations – if income • If distributed as a dividend: • Profits 1,000,000 • Less corporation tax 20% (200,000) • Retained profit £800,000 • IT @ 38.1% (AR) (304,800) • Net cash to shareholder £495,200 50.48% tax
“Similar trade or activity” - example 2 • Mrs F has been the sole shareholder of a company which carries on the trade of landscape gardening for ten years. Mrs F decides to wind up the business and retire. Because she no longer needs a company she liquidates the company and receives a distribution in a winding up. To subsidise her pension, Mrs F continues to do a small amount of gardening in his local village. • Condition C – similar trade or activity, BUT • CGT treatment would not apply if arrangements do not appear to have tax as a main purpose (condition D)
“Similar trade or activity” - example 3 Mr E is a builder who runs his business through two companies • Company 1 specialises in loft conversions, and • Company 2 specialises in extensions. Mr E winds up Company 1, but the trade of Company 2 continues. As with Example 2, Mr E continues to be involved with a trade that is similar to that of the company that is wound up, and so Condition C is satisfied.
“Continues to be involved in similar trade or activity” • Mrs C, an accountant runs her business through a company. Her husband is a self-employed lion tamer. Mrs C winds up her company and starts work for a newly- formed company owned by her husband, providing accountancy services. • Mrs C continues to be involved with the same trade or activity as the wound-up company was involved with (the provision of accountancy services), even though she is now an employee rather than business owner. • She is connected to her husband and so Condition C is met. Condition D will still need to be satisfied.
Condition D – section 396B • S396B applies Condition D where: • “it is reasonable to assume, having regard to all the circumstances , that – 1. The main purpose, or one of the main purposes of the winding up is the avoidance or reduction of a charge to income tax, or 2. The winding up forms part of arrangements the main purpose or one of the main purposes of which is the avoidance or reduction of a charge to income tax”
Factors HMRC will consider: • Is there a tax advantage, and if so, is its size consistent with a decision to wind-up a company to obtain it? • To what extent does the trade or activity carried on after the winding-up resemble the trade or activity carried on by the wound-up company? • What is the involvement in that trade or activity by the individual who received the distribution? To what extent have their working practices changed? • Are there any special circumstances? For example, is the individual merely supplying short-term consultancy to the new owners of the trade?
Factors HMRC will consider: • How much influence did the person have over the arrangements? Is it a reasonable inference that arrangements were entered into to secure this advantage? • Is there a pattern, for instance have previous companies with similar activities been wound-up? • What other factors might be present to lead to a decision to wind-up? Are these commercial and independent of tax benefits? • Any events linked with the winding-up that might reasonably be taken into account? For example, was the only trade sold to a third party, leaving just the proceeds of the sale?
Exclusions: • Distribution does not create chargeable gain • Repayment of base cost of shares • Distribution of irredeemable shares/ Demergers • Where shareholder receives shares in a new company and that new company receives all of the assets of the old. Although it is arguable that there is a tax advantage here, the chargeable gains legislation provides an exemption for reconstructions
EIS and Seed EIS and CGT planning
Tax breaks for EIS investor • 30% income tax credit* • Max £1,000,000 @ 30% • Disposal CGT exempt* • Deferral of gains • * Provided not connected • Capital loss relief v income
Qualifying Trading Company • Carry on qualifying trade, or • Parent co of trading group • Unquoted (includes AIM) • Gross assets £15m before issue (was £7m) • £16m after issue (was £8m) • SP2/00 - gross assets per B/Sheet
EIS - Qualifying Trades • UK companies or those with UK PE (branch) • Certain trades excluded (< 20%) : • Dealing in land, shares, commodities, futures etc. • Dealing in goods other than wholesale/ retail • Banking, insurance, HP, financial • Leasing, (royalties OK) • Legal and accountancy
EIS – Excluded activities: • Property development • Farming, market gardening • Woodlands and forestry • Operating/managing hotels • Operating/managing nursing homes • Companies receiving Feed In Tariffs • Providing services for non-qualifying trade
EIS / Seed EIS – Qualifying Individual • Unconnected investor • Not > 30% of share capital (with associates) • Not an employee of company (nor associates) • May become a director however • New issue of shares for cash • Retain shares for 3 years or relief clawed back • Clawback if “value received” from company
Seed EIS – “Associates” • Spouse, parent, child or • Remoter forebear or issue • Trustees of settlement where individual (or above) settlor • Not brother, sister, in-laws • Business partner
“Business Angels” • Investors may become paid directors and qualify • Unless previously connected • Or involved in carrying on any part of trade carried on by the company • May make further investment within 3 years
Seed EIS relief made permanent • Was to apply from 2012/13 for 5 years: • 50% IT reducer up to £100,000 each tax year • Plus CGT exemption on 50% of gains reinvested • No CGT on disposal of shares (after 3 years) • Total £150,000 investment per company • Many rules based on EIS • Unconnected investor • New Qualifying trading company
Seed EIS – Qualifying Company • Newly incorporated company: < 2 years prior to issue of shares • < £200,000 gross assets prior to share issue • < 25 employees when shares issued • In good financial health – not company “in difficulty”? • Unquoted companies only • Must not be in partnership • Carrying out qualifying business activity (as EIS) • Max £150,000 share issue qualifies for relief
Making Seed EIS work for your clients • Johnny starts a new software company • Needs £20,000 for new computers, plant • His aunty Betty has £20,000 in bank – minimal interest • She buys shares in nephew’s company • £10,000 income tax relief (50%) • Gains up to £10,000 exempt • No CGT on disposal of shares after 3 years • Company goes bust – set loss against income (s131)
New CGT investors relief • New CGT relief for long term investors in unquoted trading companies, not directors, employees • 10% CGT on first £10m of lifetime gains • Must be new issue of shares for new consideration • Issued on after 16 March 2016 • Held for at least 3 years • Anti-avoidance to ensure genuine commercial investment
Property disposals – 20% instead of 28% CGT • Reinvest the property gain in EIS company shares • Defers the gain until the shares are sold • Gain comes back into charge at the general rate of CGT , currently 20% for a higher rate taxpayer. • No minimum holding period for EIS deferral relief • (3 years for income tax relief and unconnected) • The reinvestment must take place during the period of 12 months before to 36 months after the date of disposal of the property.
Property disposals – 20% instead of 28% CGT • Cliff sells property in November 2016 for £300,000 making a capital gain of £100,000. • Reinvest the £100,000 gain in EIS shares Jan 2017. • The £100,000 gain would be deferred until the EIS shares are sold and the £28,000 CGT not payable • If unconnected deduct £30,000 (30%) IT liability • Cliff sells the EIS shares in February 2020 for £105,000. • £5,000 gain on the EIS shares exempt from CGT • The £100,000 deferred gain comes back into charge at the general rate 20%, so just £20,000 CGT payable.
Inheritance Tax Refresher and Update
IHT Basics • Tax on value of estate at death • + Gifts within 7 years of death • 40% tax after £325,000 => 2020 • Conservative manifesto £1,000,000 ? • Therefore give away and live for 7 years • Enough to live on? • What about the house?
IHT Basics – Importance of Domicile • UK domiciled – IHT on worldwide assets • Remain UK domiciled for 3 years if emigrate • Non UK domiciled – IHT on UK situs assets only • Deemed UK domiciled for IHT if resident for 15 years • Planning: • Put Foreign assets into trust while non – Domiciled • Assets were Excluded Property – No UK IHT • Changed from 6 April 2017
Annual IHT Planning • Exemptions – what are there? • Annual • Wedding • Normal expenditure (gifts out of income) • Family Maintenance • Charity • Watch interspouse if one non dom (now £325K) • Watch interaction between chargeable gifts and PETs = 14 year planning?
Exempt transfers -lifetime only • Annual exemption - £3,000 • Small gifts - £250 • Marriage exemption • Parents - each £5,000 • Grandparents, remoter £2,500 • Spouses £2,500 • Others £1,000 • Normal expenditure out of income
Gifts out of income • THREE CONDITIONS - S21(1) IHTA 84 • “Part of the normal expenditure” of transferor • “(Taking one year with another) it was made out of his income” • “Was left with sufficient income to maintain his normal standard of living”
36% IHT if leave 10% to charity • Applies to deaths after 6 April 2012: • 36% IHT rate if bequeath >10% of estate to charity • 10% of estate after exemptions, reliefs, NRB • Add back charitable legacy = 10% of “baseline amount” • Example: • George, single man, dies leaving estate £2,325,000 after exemptions and reliefs
IHT charity bequest example • No charitable bequest: • IHT payable £2,000,000 @ 40% = £800,000 • Net estate £1,200,000 (+ £325,000) • £200,000 left to charity: • IHT payable £1,800,000 @ 36% = £648,000 • Net estate £1,152,000 (+ £325,000) • £200,000 bequest saves £152,000 tax (76%)
Lifetime gifts • Potentially exempt transfers : • Outright gift to individual • to life tenant trust to 22.3.06 • to A&M trust to 22.3.06 • Other transfers chargeable at time of gift, • E.g. Transfer to discretionary trust • Most trusts from 22.3.06 • Transfer of value by close company
Lifetime gifts • PETS – can be done very late in life – for IHT • Gifts within annual exemptions - £3,000 pa • Over 10 years - couple can give away £66,000 • Watch CGT on gifts – not if cash • Hold over? S165 or s260 TCGA • Take gain if within £11,300 AE
Married couples & IHT nil band transfer • From 9 October 2007 • Unused nil band (%) from first spouses death transferred to survivor • Utilised on second death • No action required on first death • Claimed by LPR on second death
Nil band transfer example • Dad dies January 2008 • All of estate left to Mum, no lifetime gifts • Nil band used = 0%, balance 100% • Mum dies 2015, nil band £325,000 • Mum gets 200% = £650,000 nil band
Nil band transfer example • Dad died October 2007 – Nil Band £300,000 • £100,000 to children, balance to Mum • Nil band used = 1/3, balance 2/3 • Mum dies 2025, say nil band £360,000 • Mum gets 166.7% = £600,000 nil band
Additional Main Residence Nil Rate Band • Additional £175,000 IHT relief for family home • No IHT on transfer of family home <£1,000,000 = (£325,000 + £175,000) x 2 • Also available if downsize • Like NRB transferred to surviving spouse if unused • Taper relief by £1 for £2 over £2,000,000 before IHT reliefs – e.g. BPR, APR • May need to review client’s Will’s and estate planning
IHT Family Home Allowance • Additional IHT relief for family home, phased in: • £100,000 – 2017/18 • £125,000 – 2018/19 • £150,000 – 2019/20 • £175,000 – 2020/21 • Then increased with CPI
IHT Family Home Allowance - tapering • Taper relief by £1 for £2 over £2,000,000 before IHT reliefs – e.g. BPR, APR • Family home £900,000, business worth £5m would mean no Family Home relief! • Couple with £2m home plus £1m savings owned jointly = £1,500,000 • Leave half share to spouse on first death • On second death, estate = £3m, no relief
Residence Nil Rate Band - Downsizing • Additional NRB available if downsize: 1. to a less valuable residence and that residence, together with assets of an equivalent value to the ‘lost’ RNRB, has been left to direct descendants, or 2. sold their only residence , and the sale proceeds, or assets of an equivalent value, have been left to direct descendants, or 3. has otherwise ceased to own their only residence , and other assets of an equivalent value have been left to direct descendants
RNRB – Downsizing Conditions • Individual dies on or after 6 April 2017 • The property disposed of must have been owned by the individual and it would have qualified for the RNRB had the individual retained it • Less valuable property, or other assets of an equivalent value if the property has been disposed of, are in the deceased’s estate • Less valuable property, and any other assets of an equivalent value, are inherited by the individual’s direct descendants on that person’s death
RNRB – Downsizing – Further Conditions • Downsizing or the disposal occurs after 8 July 2015 • No time limit on the period in which the downsizing or the disposals took place before death • Any number of downsizing moves between 8 July 2015 and the date of death of the individual • Would also include disposing of part of a property (including land occupied and used as a garden or grounds) or a share in it • Where a property is given away, assets of an equivalent value to the value of the property when the gift was made must be left to direct descendants
Business and Agricultural Property Relief
Business property • 100% on unquoted shares + AIM • 50% for control of quoted co. • 100% on partnership interest, sole trader • 50% on assets used in company (controlled) or partnership • Not investment, dealing cos – IRC v George, Farmer • Own relevant property for 2 years
Agricultural Property Relief • 100% relief against agricultural value, where: • Occupied for agricultural purposes throughout 2 years prior to transfer (owner/ farmer) • Owned by him throughout a period of 7 years ending with that date has been occupied throughout that period (by him or another) for agricultural purposes. • Must have right to vacant possession within 2 years • Now applies to all new agricultural tenancies from 1995 • If above does not apply then only 50% APR
Business property (APR) - danger areas • Relief denied if binding contract for sale • Lifetime gifts • Asset must still be owned by donee at donor’s death • Must qualify for BPR/APR at death • Excepted assets – cash? Barclays Bank Trust Co • Assets used by family company?
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